What Is Buying On Margin?

Buying on margin means borrowing money from a broker to buy stock or loan from the brokerage firm, and in order to trade on margin, you need to create a margin account. Margin trading permits you to purchase more stocks than you can normally buy.

This is different from a regular cash account, in which you trade using the investment from the account. Your broker is obliged to get your signature for margin account authentication.

This margin account can be part of your standard account opening agreement, or may be entirely separate agreement.

An initial investment of $2,000−which is the minimum margin−is required in order to open a margin account, but some brokerages firms require more. You can borrow up to 50 percent of the purchase price of a stock once the account is opened and active.

This share of purchase that you deposit is recognized as the initial margin. It is important to know that you do not have to margin all the way up to 50 percent. You can borrow a smaller amount like 10% or 25%. Just be aware that some brokerages will need you to deposit more than 50 percent of the purchase price.

As long as you fulfill your obligations, you can keep your loan as long as you want.

First, when you trade your stock in a margin account, the profit will go to your broker against the settlement of the loan until it is completely paid.

Second, there is also the limit called the maintenance margin. This is the minimum balance you should maintain before your broker will oblige you to deposit additional funds or sell stock to pay down your credit. When this occurs, they call it margin call.

Margin Call is the broker’s demand on an investor to deposit additional funds or securities so that the margin account is carried up to the minimum maintenance margin. Margin calls happen when your account value is reduced to an amount planned by the broker.

This is sometimes called "fed call" or "maintenance call."

Margin securities in the account are warranty. You will also need to pay the interest on your loan. Unless you agree to make payments, the interest charges are applied to your account. In time, your liability level increases as interest charges grow against you. Therefore, trading on margin is mainly used for short-term investments.

The longer time you hold an investment, the bigger return is needed to breakeven. That is why, if you hold an investment on margin for a long period of time, the chances that you will make a profit are loaded against you.

The buying influence of a margin account regularly changes depending on the price movement of the margin securities in the account.